Protecting Consumers Purchasing Medical Insurance

I’ve been gnashing my teeth over the July 1 New York Times front page story about yet another medical bankruptcy. Lawrence Yurdin, a 64 year old who worked for a temp agency, purchased an Aetna policy through his employer. The policy offered $150,000 in hospital benefits. The catch? It covered only room and board. That wasn’t much help when he was hospitalized for heart surgery.

Now – Senator Charles Grassley is investigating Aetna -- which is a good thing. When he investigated United Health Care for similar policies, the company announced it would no longer sell such “limited” policies.

But a company-by-company review isn’t really the answer here. Even those who believe strongly in the marketplace recognize an important role for government regulation – and this is an area of medical insurance just calling out for such intervention.

What’s wrong with a policy that covers only hospital room and board?

1. Transparency: You’d almost have to be a lawyer to figure out the restrictions of coverage. Even the Aetna preregistration department, it appears, didn’t realize how restrictive the policy really was!

2. Value: This type of coverage would lead to a low “medical loss ratio,” meaning that too much of the premium paid would go to health plan profits or administration rather than to financing health care.

3. Public Policy. I can’t think of anyone who would be well-served by purchasing this type of policy. Government generally only allows sale of insurance contracts that are not contrary to public policy, so this type of restrictive benefit is just aching to be banned.

Many states regulate health insurance effectively. I remember watching the movie Sicko and commenting that most of the egregious health plan activities, like aggressive underwriting that would withdraw coverage for cancer therapy because a claimant hadn’t ‘fessed up about a past vaginal yeast infection, are simply illegal here in Massachusetts. But fixing this problem state by state will take too long, and there will be too many unprotected victims along the way.

There is excellent precedent for the federal government regulating the private health insurance market. A good model is federal regulations which transformed the “Medigap” market a few years ago.

Medicare offers incomplete coverage – and participants have to pay $1,068 inpatient deductible each year, 20% coinsurance for doctors’ services, and between $267 to $534 for each hospital day. Many seniors purchase a Medigap policy to cover these ‘gaps’ in Medicare coverage.

Prior to regulation, the Medigap market was a giant mess. Many senior citizens purchased multiple overlapping plans – most famously some paid premiums for more than one Medigap plan while they could not afford food. Medigap regulation

-Mandated that all Medigap plans offer certain minimal coverage

-Standardized product design

-Prohibited companies from knowingly selling more than a single plan to an individual.

-Banned agent bonus commissions on this product.

It was possible to pass this legislation, in part, because legislators recognized that senior citizens were vulnerable – and were deserving of special protection. The insurance industry suggested that this type of regulation might chase many insurers from the market – but it turned out that there is still plenty of choice in this market.

Lawrence Yurden and his wife will lose just about everything because he trusted his health care financing to an ill-designed insurance policy that victimized him. We’re all vulnerable here – and appropriate regulation would be an important adjunct to a fully-functional private insurance market.